If you thought oil prices and India’s stock market index--Sensex--are Siamese twins, think again. The umbilical cord connecting the two has been cut, mainly due to the uncertainty of oil prices, which hit $144 a barrel on Monday.
Till now, oil prices and stock markets across the globe moved in tandem, but things changed when the oil prices skyrocketed to above $100 a barrel level. When oil rates moved up defying gravity, the Sensex started its southward journey. According to market analysts, the reason for this is that, no stock market in the world likes uncertainty. So, when oil prices crossed $90-100 a barrel, it became unpredictable for market players. As a result, stock market witnessed an exodus with many investors withdrawing their money from stocks and putting it in more reliable commodities.
Sensex came down from above 20000 points to 13000 points level during the upheaval in oil prices, which moved northwards around 50% in the past six months.
This phenomenon is not exclusive to India. New York investors are also finding out that oil and stocks don’t mix. As the price of oil has soared, markets have slumped there also.
With the price of petroleum up 50 per cent since the New Year, the Standard & Poor’s 500 index is down 12.6 per cent. In the past month, the S&P has dropped 8.7 per cent. At the same time, the price of oil is up $13 a barrel, or 10.2 per cent, for the month.
The turmoil on Wall Street and rising price of oil is coming at a time when there are renewed concerns about another sector of the economy: banking, which continues to see large write-offs from the subprime mortgage crisis.
That could be helping to drive some investors from stocks into commodities, including oil. This, in turn, keeps the price of oil moving higher even as supply-and-demand fundamentals deteriorate.
Meanwhile, the Federal Reserve left short-term interest rates unchanged. The Fed toughened its language on inflation but did not send a clear sign it would be raising interest rates anytime soon. The Fed would normally raise interest rates to try to curtail inflation.
A rate increase by the Fed might be enough to shock the oil market.
An interest-rate increase might also help stabilise the dollar, which sank further after the European Central Bank signaled last week it was likely to raise interest rates to counter inflation.
While the price of oil has been rising, financial stocks such as Citigroup and Lehman Brothers on Wall Street have been falling.
1 comment:
Mr, januram.
by when would this price rocket come to an end?
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